Section 54B | Exemption From Capital Gain on Transfer of Land used for Agricultural Purposes

On transfer of land, a capital gain arises and the seller has to pay capital gain tax on the capital gain so arises under section 45 of the Income Tax Act, 1961. But if the land transferred was used for the purpose of agriculture, then the seller can claim exemption under section 54B of the Income Tax Act, 1961. Let us discuss in detail about Section 54B.

Eligibility & Conditions of Section 54B

Eligibility: Individual & HUF

The following conditions must be satisfied to claim benefit of Section 54B-

1. There should be a transfer of urban agricultural land.
2. The land must have been utilized for agricultural purposes either by the individual or his parents or the Hindu Undivided Family in two years immediately preceding the date of transfer.
3. The assessee must purchase a new land which shall be utilized for the purpose of agriculture within a period of two years from the date of transfer.

Amount of Exemption

The amount of exemption provided under section 54B shall be lower of-

1. The amount of Capital Gain arising on transfer or
2. The cost of new agricultural land including the amount deposited in the Capital Gain Account Scheme.

Consequences of transferring the New Land

The exemption under section 54B is available only if the capital gain arising on transfer of land used for agricultural purpose is utilized for purchasing another land which will be utilized for the purpose of agriculture. However, to avoid the misutilization of the benefit of this section, a restriction has been inserted in Section 54B.

The section restricts transfer of new land within a period 3 years from the date of its purchase.

If the new land is transferred within the said period then it shall be dealt in the following manner-

• Then cost of new land purchased will be reduced by the amount of capital gain exempted earlier 

Lets take an example to understand such lock in period

• Mr X has sold an urban agriculture Land (used for Agriculture purpose) & capital gain arising Rs. 3 Lakhs & New agriculture land purchased amounts to Rs. 4 Lakhs in PY 22-23 & Such New land has been transferred in the PY 23-24 for the Amount 5 Lakhs.

Exemption available under Section 54B in the PY 22.23 will be lower of following 

1.  Rs. 3 Lakhs (Capital gain) 
2.  Rs. 4 Lakhs (Cost of new land) I.e. Rs. 3 Lakhs

Capital gains arising out of new land Will be computed as follows:

Computation of Capital Gain For FY 23-24

Illustration(Comprehensive)

Mr. Raheja sold his agricultural land in April, 2023 for Rs. 24,00,000/-. For the past 10 years the land was used for agricultural purposes. Long-term capital gain arising on transfer of the land amounted to Rs. 9,00,000/-. In December, 2023, he purchased another agricultural land worth Rs. 10,00,000/-. The new land was however, sold in April, 2024 for Rs. 12,00,000/-. What will be the amount of taxable capital gains in the hands of Mr. Raheja for the financial years 2023-24 and 2024-25?

Computation of capital gains for the financial year 2023-24

(*) Exemption under section 54B will be lower of following :

• Amount of capital gains arising on transfer of agricultural land, or
• Investment in new agricultural land

Considering the above provisions, the exemption in this case will be lower of the following amount :

• Amount of capital gain arising on transfer of agricultural land, i.e., Rs. 9,00,000 or
• Amount of investment in new agricultural land, i.e., Rs. 10,00,000

Thus, exemption will be Rs. 9,00,000.

Computation of capital gains for the year 2024-25

If a taxpayer purchases another agricultural land and claims exemption under section 54B and subsequently he transfers the new agricultural land within a period of 3 years from the date of its acquisition, then the benefit earlier granted under section 54B will be withdrawn. The computation in this case will be as follows :

(*) If the agricultural land is sold before a period of 3 years from the date of its purchase, then at the time of computation of capital gain arising on transfer of the new agricultural land, the amount of capital gain claimed as exempt under section 54B will be deducted from the cost of acquisition of the new agricultural land. Applying this provisions the cost of acquisition of new land will be computed as follows :

Capital Gain Deposit Account Scheme

The amount of capital gain,to the extent not utilised in purchasing the new land before the due date of filing return under section 139(1)shall be deposited in the Capital Gain Deposit Account Scheme.

If the amount deposited in the Capital Gain Deposit Account Scheme is not wholly or partly utilized for the purchase of new land within a period of two years from the date of transfer, then the unutilized amount shall be taxed as income of the previous year in which the period of two years from the date of transfer expires under section 45 of the Income Tax Act, 1961.